Madhu.T.K
Industrial Relations And Labour Laws
TIKARAM CHAUDHARY
Gratuity & Leave Encashment Trust Fund
Vmlakshminarayanan
Sr.manager - Hr&admin

Cite.Co is a repository of information created by your industry peers and experienced seniors sharing their experience and insights.
Join Us and help by adding your inputs. Contributions From Other Members Follow Below...
Hello Everyone, I would like to know that for a person working as a Vice President in Pvt. Ltd. company, for him company has to pay him Gratuity or Bonus in monthly salary or have to pay separately? like bonus yearly & gratuity after leaving the job (if he completes continues 5 years job)?
Hi,
Even Vice President category, if employed on stipulated terms and conditions of the Employer is eligible for Gratuity provided he/she fulfills the eligibility criteria as stipulated by the Gratuity Act. Obviously Gratuity to be paid after exit only.
With regard to Bonus for such Senior level with high salary Bonus will not be applicable. However a lump sum amount may be paid by the employer in the name of ex-Gratia or performance bonus or incentive....

Thank you so much V.M.Lakshminarayanan,
True, about bonus, I would like to put it like this,,,,it is not the level of the employee but salary of the employee which will decide whether bonus is payable to an employee or not and, of course, bonus will not be applicable if the bonus qualifying salary of the so called VP is not more than Rs 21000 per month!
I have seen the salary structure of a very senior level employee employed in one of the Top TEN software companies in India. The CTC structure speaks about a gratuity which is calculated based on his BASIC SALARY which was Rs 13000 per month! If the gratuity qualifying salary of that employee is Rs 13000, as against his fixed remuneration of Rs 1, 37,000, he should get bonus also. This is because, for both purposes, the wages/ salary means the sum total of the amounts that an employee gets as per the contract of employment. If you say that his "salary" is Rs 137,000 and hence he is not eligible to bonus, you should calculate his gratuity also on that "salary". You cannot have two treatment,one for payment of bonus and another for payment of gratuity.

In this article, we will understand the Taxation Benefits available under Pay as you Go and Funding Option to companies..
1. An Overview Gratuity Benefits
Gratuity benefits are governed by "The Payment of Gratuity Act 1972" and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal. It means, Gratuity amount is determined only on the monthly terminal wages of the employee on his exit from the Company after completion of 5 years of Service. The cost is to be borne by the Company and not by an employee. hence, unlike other fringe benefits (i.e. Medical Insurance, Term Insurance & Accidental Insurance) it can not be part of CTC. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
2. Calculation of Gratuity Benefits
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages will include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula:-
(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)
3. Factors affecting Quantum of Gratuity Benefits
Gratuity Benefits changes with the change in the following:-
(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formula of the Gratuity Benefit due to the amendment in the Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,
You may visit my article published at www.taxguru.com for understanding impact of the above Factors on Gratuity Benefits. The web-link for the article is as under :- https://taxguru.in/income-tax/factor...-benefits.html
4. Legal Provisions on Employer under Payment of Gratuity Act 1972 (Amended)
Section 7 of the Act has kept the obligation for payment of gratuity act on the shoulders of the employer, few provisions of the act are listed below:-
i. As soon as Gratuity becomes payable, it employers responsibility to determine the amount of gratuity and inform it to an employee in writing (Refer subsection 2 of Section 7 of the Act).
ii. The employer shall arrange to pay the amount of gratuity within 30 days from the date when it becomes mandatory. (Refer Sub-section 3 of Section 7 of the Act).
iii. If the amount of gratuity is not paid within 30 days then the amount of gratuity and simple interest will be paid by the employer to the employee for the duration when the payment is not made to the employee. (Refer Sub-section 4 of Section 7 of the Act).
5. Accounting & Funding Options for Gratuity Benefits
Gratuity Plan falls in the category of Defined Benefit Obligation and it increases exponentially with the increase in wages of employee and service period of the employee & it is employers responsibility to pay the gratuity to the employee in any case. Companies have generally 2 options for discharging the Gratuity Liability: -
1. Accounting Option – Under this option provision of gratuity is made in Financial Statement of the Company by taking Actuarial Valuation Report from the Actuary and when employee leaves the company employee, employer pays the gratuity from their own resources. This option is called "Pay as you go Option". This is mandatory for all companies having 10 or more companies. Few more points to be considered by the Auditors whilst Auditing the Financial Statement in respect of Accounting of Gratuity Benefits are as under :-
A. Every registered company needs to prepare the Financial Statements such as Balance Sheet & Profit/Loss at the end of Accounting Year to comply with requirement of Section 133 of Companies Act 2013.
B. Accounting of Gratuity Benefits is prescribed in Accounting Standard 15 (Revised 2005) and it is mandatory in nature. Accordingly companies made provision of Gratuity Liability in their Balance Sheet to Comply with the requirements of following Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) by taking an Actuarial Valuation Report/Certificate from Actuary (Refer Para 49 of AS 15 (Revised 2005)).

C. The proper compliance and provisions of these Accounting Standards lies on the shoulders of Director/Auditors of the Company. There are some service which can not be rendered by the Auditors are listed in Section 144 (Auditor not to render certain services) of companies Act 2013. The list of these services are as under :-
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
D. Ministry of Corporate Affairs notified Financial Reporting Authority (NFRA) rules 2018 on 13.11.2018. The main Functions and duties of the NFRA Authority are Recommending accounting standards and auditing standards, Monitoring and enforcing compliance with Accounting Standards and Auditing standards, Overseeing the quality of Audit service and suggesting measures for improvement, Power to investigate, Disciplinary proceedings, Manner of enforcement of orders passed in disciplinary proceedings, Punishment in case of non-compliance etc.
In Indian context, Companies needs Actuarial Services for Compliance of following Accounting Standards for Accounting of Defined Benefit Plans (i.e. Gratuity Plan, Leave Encashment Plan, Pension Plan, PRMB etc.):-
a. AS 15 (Revised 2005)
b. IndAS 19
c. IAS 19 (Revised 2011)
The following criteria is followed by the companies for compliance of above Accounting Standards and for Accounting of Defined Benefit Plans is as under :-
(i) SME - In this case, company needs to disclose details as required for Clause (l) of Para 120 of AS 15 (Revised 2005)
(ii) Non - SME - In this case, company needs to disclose details as required for Para 120 of AS 15 (Revised 2005)
(iii) Companies with Net-worth more 250 cr. - In this case, companies and their subsidiaries has to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years.
(iv) Multinational Companies needs to comply with IAS 19 (Revised 2011) for provisioning of Defined Benefit Plans in their Financial Statement for consolidated provisioning in Financial Statement of their International Group Companies.
2. Funding Option –In this option, Companies make provision of Gratuity liability in the balance on annually on accrual basis based on actuarial report but it is not allowed as deduction whilst computing net Income of Income Tax (Refer Section 47A (7) of Income Tax Act 1961), So companies prefer to create Gratuity Trust. There are 2 major benefits to the company by creating an Irrevocable Trust:-
(i) Contribution into Approved Trust is allowed as deductible Expense - Provision of Gratuity Liability shown in the Balance Sheet is not allowed as deduction whilst computing net Income for Income Tax ((Refer Section 47A (7) of Income Tax Act 1961) whereas Initial and Annual Ordinary Contribution made by company into an Approved Gratuity Trust (Subject to condition specified in Income Tax Rules 103 & 104) is allowed as deductible expense under Section 36 (1) (v).
(ii) Interest received from Investment of an Approved Gratuity Trust is also exempted as Income Tax :- Interest received from Investment of an Approved Trust is also exempted as Income under Section 10 (25) (iv) of the Income Tax Act, 1961.
6. Quantum of taxation benefits available to companies under Pay as you and Funding Option are as under:-
To understand Taxation benefits of Accounting/Fund Arrangement for Gratuity Benefits , let us take an Example, Mr. A Joins the Organization with a Basic Pay of Rs. 26,000/- per month and monthly CTC of 50,000/-. Assuming that expected increase in basic salary is assumed to be 10% p.a.
Now Gratuity Payments for next 5 years will be :-
On Completion of 1 Yr – (15/26)* 28,600*1 = 16,500/-
On Completion of 2 Yrs – (15/26)*31,460*2 = 36,300/-
On Completion of 3 Yrs – (15/26)*34,606*3 = 59,895/-
On Completion of 4 Yrs – (15/26)*38,067*4 = 87,847/-
On Completion of 5 Yrs – (15/26)*41,873*5 = 1,20,788/-
Expected Tax Benefit calculation in case of “Pay as you Go Option” :-
For Provision of 1st Yr – NIL
For Provision of 2nd Yr – NIL
For Provision of 3rd Yr – NIL
For Provision of 4th Yr – NIL
For Payment on 5th Yr – 1,20,788/-
In this case company, Mr. A will leave the company then company will get the tax benefit of Rs. 1,20,788/-.
Expected Tax Benefit calculation in case of “Funding Option” under Section 36(1)(v) of the IT Act 1961 for Annual Contribution which is 8.33% of Annual Basic Salary of Employee.
For Contribution of 1st Yr – 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr – 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr – 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr – 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr – 38,067*12*0.833 = 41,857/-
In this case, Mr. A will get gratuity of Rs. 1,20,788/- from the Gratuity Trust and employer will get approximate Tax Benefits of Rs.1,74,536/- for annual contribution made by him in previous 5 years.
To get more clarity on the above example, let us take some more questions about the possibilities/event that may happen on or after completion of 5 years and their impact on the Company in case of “Funding Option” :-
Question 1. If employee died during 1st to 4th year before completion of 5th year, then what would be the benefit for Company and employee’s Nominee ?
Answer 1. If employees died after 1 yr, 2nd, 3rd and 4th year but before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr – 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr – 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr – 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr – 38,067*12*0.833 = 38,051/-
The company will get the Tax for the contribution made by him before the date of death of the employee as stated above and employee’s nominee will get following Gratuity Payments from the Trust along with a future service gratuity subject to certain limits as defined by the Insurance Company whilst taking Group Gratuity Scheme from the Insurance Company.
Question 2. If the employee resigns during 1st to 4th year and before completion of 5th year, then what would be the benefit for Company and employee?
Answer 2. If employees resign during 1st to 4th year and before completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr – 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr – 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr – 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr – 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr – 38,067*12*0.833 = 41,857/-
and the employee will not get following Gratuity Payment from the Trust. The amount contributed by the company and interest accrued will be used by the trust for future payments of Gratuity to other employees of the company.
Question 3. If the employee resigns/retires after completion of 5th year, then what would be the benefit for Company and employee?
Answer 3. If employees resigns/retires during after completion of 5th year, then the company will get tax benefits for the following contributions:-
For Contribution of 1st Yr – 28,600*12*0.833 = 28,589/-
For Contribution of 2nd Yr – 31,460*12*0.833 = 31,447/-
For Contribution of 3rd Yr – 34,606*12*0.833 = 34,592/-
For Contribution of 4th Yr – 38,067*12*0.833 = 38,051/-
For Contribution of 5th Yr – 38,067*12*0.833 = 41,857/-
Total Contribution in 5 years……………..……= Rs.1,74,536/-
and the employee will get Rs. 1,20,788/- as Gratuity Payment from the Trust. Since the company has contributed an amount in the trust is more then what is payable after 5th year so the surplus amount and interest accrued on the contributions of will be used by the trust for payment to the other employees.
In Indian Context, Most Companies prefer to create funding arrangement for Gratuity benefits through An Approved Gratuity Trust and managing Gratuity Fund Investment the following methods :-
A. Investment of Trust Money by Trustees.
B. Investment of Trust money into Group Gratuity Scheme of Insurer by Trustees.
(Please note that in both cases approval of Gratuity Trust in terms of Part C of the Forth Schedule to the Income Tax Act, 1961 is mandatory for organizations to get benefits under Section 36 (1) (v) & Section 10 (25) (iv))
The establishment of Gratuity Trust requires in-depth knowledge of various rules/regulations and expertise. We have a team-leading Professionals, Litigation Partners, Chartered Accountants, Company Secretaries & Heads of Insurance Companies having decades of experience in providing their services to our clients spread in all sectors of the Indian Economy, in the Public & Private Sectors which covers areas of Manufacturing, Software, Technology, Electricity, Electronics, Call Centers, Banks, Educational Institutes, Schools, Universities, Hotels, Hospitals, Hospitality Companies, etc. etc.
We offer paid online/offline End to End Support Services for the following :-
1. Consultancy Services for Formation of a New Approved Irrevocable Gratuity Trust,
2. Consultancy Services for Approval of Gratuity Trust from Authority,
3. Consultancy Services for Group Gratuity Schemes of Insurers,
4. Consultancy Services for Investment of Privately Managed Gratuity Trusts,
5. Consultancy Services for Investment of Employer-Employee Schemes,
6. Consultancy Services for Retention Policies,
7. Support Services for Actuarial Valuations in compliance of AS 15 (Rev. 2005), IndAS 19 & IAS 19-IFRS
8. Support Services for Fair Value Valuations in compliance of IndAS-113, IndAS-36, IndAS-103, IndAS-109 IndAS-28, IndAS-38, IndAS-102 & IndAS-16.
For more details or Consultation/Advise on the above matter, you may contact me at 9211637063 or email me your queries at
Tika Ram Chaudhary
Gratuity & Leave Encashment Trust Fund Consultant
(Corporate Consultant with more than 10 Years of experience in providing Support Services for Actuarial Valuations in compliance of AS 15 R, IndAS 19 & IAS 19 R under Gratuity and Leave Encashment and Formation of Gratuity and Leave Encashment Trusts)
Registered Office Address : R 11, First Floor, R Block, Vikas Nagar, Uttam Nagar, New Delhi -110059
Mobile Number : 9211637063
Email Id :
LinkedIn Profile : https://www.linkedin.com/in/tika-ram...hary-a5727848/
Caclubindia Profile : https://www.caclubindia.com/profile....ber_id=1446582
Taxguru Profile: https://taxguru.in/author/tikaramchaudhary@gmail.com/
Blog: http://gratuitytrustfundconsultant.blogspot.com
Google Business Listing: https://gratuity-trust-fund-consulta...business.site/
(All services/consultancy is subject to terms and conditions)
This message and any attachment are confidential. If you are not the intended recipient please delete this message and all attachments from your system. You must not copy this message or any attachment or disclose the contents to any other person. The sender does not accept liability for any errors, omissions or consequences which arise as a result of e-mail transmission

Please Login To Add Reply






About Us Advertise Contact Us
Privacy Policy Disclaimer Terms Of Service



All rights reserved @ 2020 Cite.Co™